Tax, Legal and Technical

Monthly Archives: October 2013

One of the most important jobs of a financial adviser is to help their clients appreciate the existence of and then put in place reasonable measures to deal with risk. Financial risk.

An essential part of that process in relation to making investments is, no surprises here, the risk assessment, to clarify the investors “attitude to risk”.

It is generally accepted that investors should be encouraged to consider risk in two ways.

Your ability or capacity to take risk. This is all about your financial circumstances and goals. If you have more wealth and can invest over longer periods, you may be more able to accept a higher degree of risk.

Your attitude or willingness to take risk. This is more of a mental approach. Some people may not be able to sleep at night at the thought that their investment can fall in value rather than rise.

Both of these aspects ought to be discussed through the risk assessment .

Almost inevitably, many of these risk assessments result in the investor being categorised as being a “medium risk” investor .

A typical description of this type of investor might be as follows:

“The opportunity to achieve attractive returns (for growth or income needs) is very important to you but you also want to invest in a way that does not expose all of your capital to more riskier investments. You have some experience in taking investment risks and accept this is necessary to achieve potential returns much higher than those available from cash deposits. You understand that this could involve your capital being invested for five years or more with medium to medium high exposure to stocks and shares and other more riskier investments.

You understand that the value of any investments you make will fluctuate and you might get back less (or more) than you invested (at maturity or earlier).”

Typically, investors would be regularly re-assessed to determine if their attitude to risk had changed.

It occurs to me that this process of risk assessment should be more frequently extended to the owners of SMEs who (implicitly or explicitly are relying on their business as their pension) and potential “Nevertirees” (those who are , through choice, likely to continue working in whatever capacity) to encourage them assess or re-assess the risk that might be inherent in their plans.

The underlying assumption for these people (that they, through continued working or their business will continue to supply sufficient income to deliver an acceptable/desirable lifestyle) must be accepted as carrying some level of risk. But first they need to appreciate that through their actions they are , in effect, making important investment decisions . It’s just that they won’t feel like they are.

In many cases , such individuals through a traditional risk assessment in connection with say an investment of available money, may be categorised as “medium risk”. However, in relation to what they are doing through reliance on their business (in effect a single unquoted, illiquid private equity) or reliance on themselves being able to continue to deliver a required level of income, they would be more appropriately categorised as “High Risk” .

If the adviser, in a non confrontational and professional way can get the client to appreciate this then the anxiety necessary for action to result may be generated.

It is likely though, that the client who is relying on their business doesn’t feel like they are taking a high risk by doing so. That’s probably because when they go into work it doesn’t feel like they are making an investment – they are just doing what they do. Making them appreciate the risk and then re-appraising and if necessary adjusting their financial plans in the light of this will be a fundamentally important achievement for the adviser.

While getting risk onto the agenda for many would be “nevertirees” will be essential, it will in many cases be entirely reasonable to assume that some continued income flow will result from their endeavours. And this can be factored into planning to determine what the likely gap will be between what they want to achieve as a future income and what they will based on their current planning – taking account of the risk that the “best case” (eg the continuation of current income at it’s current level will continue forever) may not be what happens in reality. By embracing, with appropriate caution built in, the likelihood that some income from endeavour or business will continue, the future income goal will appear more reasonable. And planning can proceed from this base. In effect the individual and their adviser will have realised and accepted they they and/or their business is an asset class and through application of their “true” assessed attitude to risk, it will make some sense to add some diversification to the financial plan. This should also include appropriate life and income protection insurance. After all is not reasonable to include the impact of death or serious illness in our risk assessment?

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The Sunday night Downton fest and the preceding X Factor competition (Judges” houses” ..except they are’nt ..mostly ..shades of Cartman there …mostly) represents a juxtaposition that may, at first sight, seem strange and then on reflection be appreciated as being somewhat aligned – at least in their generation of the viewing public’s dedication and approbation.

One has affected voices, histrionics, desperation and tears and the other is the X Factor.

I appreciate that I am WAY behind the journalistic curve by referencing Downton though. Those far a quicker off the mark than me were all over aspects of this latest “season” by using Matthew Crawley’s lack of a will to (understandably) launch into a strongly reasoned argument for the benefits of having one, a valid will that is.

But it turns out there was one – a will – although not “a will as such” according to Lord Grantham. So with the football fan in me coming to the fore “too soon, you started writing too soon!”…. you know how it goes – well any of you who go to football that is….especially Citizens.

So it turns out that Matthew did leave a written (and presumably ) witnessed document that was sufficient to satisfy the requirements for a valid will. A grander examination of what “Matty boy” said in the will, how it was expressed, signed and witnessed did not take place in the programme. That could have got a bit dull but perhaps at the end the programme announcer could have announced that it qualified for a hour’s structured CPD – subject to there being clearly stated “learning outcomes” expressed at the beginning of the programme. But we digress.

At this point I thought it might be worth reminding you what the requirements for a valid will are in case any of you have been inspired by Downton to put your affairs in order.

So what makes a will a valid will – so to speak? There are four main requirements.

First , a will must be in writing unless it is a privileged will but no special form of words is required. It can be hand-written or typed. It doesn’t have to be on any special form. A privileged will is exempt from complying with the Wills Act and can only be made by a member of the armed forces engaged in actual military service or in conditions similar to active military service. One wonders if this rule could be stretched to incorporate stewards at a Tottenham v Arsenal/Chelsea/West Ham game.

Second , the testator or testatrix must sign the will. The courts will accept as a signature whatever mark was intended to be their signature, and this can include a cross or other mark. Normally the signature is made at the end of the will but if the will is signed elsewhere it can still be valid.

Third, he testator or testatrix must intend to give effective to the will be signing it.

Testamentary intent involves the testator having subjectively intended that the document in question constitute his or her will at the time it was executed. Ordinarily, the opening recital, eg “I, Matthew Crawley, do hereby declare this instrument to be my last will and testament …” will usually suffice. This could, if you wish be written on a piece of paper that can conveniently drop from the book in which you place it when, after your death someone looks through your things. You could also sew it inside your favourite teddy bear or, perhaps, deposit it for safekeeping and make it clear to all where it is. But that would be too easy and not nearly dramatic enough for a TV representation of your post death drama.

And fourth the testator or testatrix’s signature must be witnessed by at least two witnesses. They must both be present at the same time when the testator or testatrix signs the will. The witnesses must acknowledge the signature in the presence of the testator or testatrix though not necessarily in the presence of each other.

Get it? Got it? Good !! Go testate!!

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2. Go to www.techlink.co.uk and click the Free Trial link at the right of the screen and then request which free trial you wish to have from the options shown. You will then be given 4 weeks free access to Techlink Professional and/or Techlink Communicator and an example of the Communicator content.